Google Stock Plan Irks Governance Watchdogs
The stock declined 4.1 percent to $624.60, the biggest decrease since Jan. 20, weighed down in part by results showing slower sales growth and a decline in the amount Google charges for advertising, on a per-click basis. The shares have fallen 3.3 percent this year.
Google unveiled a plan yesterday that lets the company issue new shares without diluting the founders’ voting power. The stock change would create a new class of nonvoting shares that will be distributed to existing shareholders in what is effectively a 2-for-1 stock split.
Page and Brin, who made no secret of their intention to hold sway over the company when it went public in 2004, aim to keep that control as Google grows larger. The latest move lets the founders issue stock to compensate workers or make acquisitions without loosening their grip. For investors, the result is a lack of input on decision making, said Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance.
“Shareholder voting rights are pretty limited in Google,” he said. “And this basically perpetuates that reality.”
Together with Chairman Eric Schmidt, Google’s co-founders have about two-thirds of the company’s voting power, thanks to a dual-class stock structure that was created before its initial public offering eight years ago.
Opposition to Structure
The company already had one class of stock with less voting power, Class A. The new type, Class C, will have none at all.
Egan-Jones Ratings Co., a shareholder-advisory firm, said it opposes Google’s plan. Institutional Shareholder Services Inc. and Glass Lewis & Co., other advisory firms, are reviewing the proposal and plan to issue reports on it before Google’s shareholder meeting, scheduled for June 21.
“As a trusted adviser to institutional investors, we strongly oppose governance structures, such as currently exists at Google and as proposed, in which the holders of one class of common stock have voting rights with fewer votes per share,” Egan-Jones said today in a statement.
It’s hard to tell why the additional step was necessary, said Tim Ghriskey, a co-founder of the Solaris Group, who helps oversee about $2 billion in assets, including Google shares.
He would rather see Google pay a cash dividend, Ghriskey said. Still, if investors aren’t happy, they can always sell their shares, he said.
“We live with it,” Ghriskey said. “It wouldn’t be our first choice. Our first choice would be split the stock and don’t create two classes, and start paying a dividend.”
Google put in the original dual-class structure to insulate the company from outside pressures while it made potentially risky investments, such as the video-sharing site YouTube or the Android mobile operating system, Page and Brin said yesterday in a statement. The latest change solidifies those protections.
“We recognize that some people, particularly those who opposed this structure at the start, won’t support this change - - and we understand that other companies have been very successful with more traditional governance models,” the founders said. “But after careful consideration with our board of directors, we have decided that maintaining this founder-led approach is in the best interests of Google, our shareholders and our users.”
The announcement was made as part of the company’s first- quarter earnings report. Profit, excluding certain costs, climbed to $10.08 a share in the period, the company said on its website. Analysts had projected $9.64 on average, according to data compiled by Bloomberg. Excluding revenue passed on to partner sites, sales rose to $8.14 billion, matching estimates.
Google gets most of its revenue from Internet-search ads -- the text links that appear in query results. The average cost per click, a measure of what Google can charge advertisers, declined 12 percent in the first quarter, an acceleration from 8 percent in the fourth quarter.
Gillis called the decline “startling” and wrote that it suggests “incremental search volume that is being created is lower priced inventory.”
Founders in Control
The desire to hold on to control has always been a driving force at Google, Gillis said in an interview.
“That’s been Google’s story,” he said.
While the new proposal will be subject to a vote at Google’s annual meeting, the fact that Page, Brin and Schmidt control the majority of voting power makes it likely to succeed. “We expect it to pass,” David Drummond, Google’s chief legal officer, said in yesterday’s statement.
Under the plan, investors will receive one share of the new stock for each one they hold. So a share valued at $600 when the split takes effect would become two shares, each valued at $300.
Paul Hodgson, a researcher at GovernanceMetrics International Inc., a corporate-governance consulting firm in New York, said the approach isn’t ideal because it puts unnecessary limits on shareholders.
“That is anti-best practice as far as best governance, but so was the dual-class structure in the first IPO,” Hodgson said. “There are plenty of companies that have a single class of shares, one vote per share, and they aren’t paranoid that shareholders are going to somehow influence the future strategy of the company.”
Google’s founders have lost voting power by selling stock in recent years, and the new structure would help prevent them from losing more, said Lise Buyer, principal at Class V Group in Portola Valley, California.
“As the founders sell a little bit, as they have been doing every quarter, their voting power relative to the shareholder base is going down,” said Buyer, who helped advise Google on its IPO.
The stock split won’t reduce investors’ power in the immediate term, since they’ll still have as many votes as before, said Clay Moran, an analyst at Benchmark Co. in Delray Beach, Florida. Still, it adds one more layer of structure.
“It’s unnecessarily complex,” he said.
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